Illinois: Payment Processors Not Marketplace Facilitators

The Illinois Department of Revenue, in its general information letter, addressed a question raised by a foreign payment processing company about how statewide sales and use tax rules apply to businesses operating in the background of e-commerce transactions. More specifically, the company, which provides card payment processing and fraud prevention services to international e-commerce sellers, wanted to know whether such services qualify it as a marketplace facilitator.

The DOR Interpretation of Marketplace Facilitator Rules

The company provides card payment processing services under two contractual structures, referred to as Model A and Model B, each governed by a separate Master Service Agreement. The main difference between these two models is not the underlying services, but the structural requirements imposed by payment card networks such as Visa and Mastercard. 

Due to its innovative localization solution, which differs from the existing account categories recognized by those networks, the company was required to align with the closest available merchant account framework to continue offering card payment methods. As a result, the company structured its agreements to comply with the payment networks' merchant account rules, including provisions that, on paper, required the merchant account holder to take title to the goods sold.

Such a contractual framing allowed the company to operate within the networks’ existing schemes, even though its functional role in the transactions between merchants and customers remained limited. Essentially, the company acted in the same way as a traditional payment processor or payment facilitator, comparable to services such as Stripe, Square, or PayPal, and did not meaningfully participate in the sale of goods. 

The company required clarification from the DOR on how to classify each model for Illinois sales and use tax purposes. Ultimately, the DOR concluded that the company does not meet the definition of a marketplace facilitator under Illinois law. 

The main reason for this conclusion was that the company does not operate a marketplace, does not list or advertise products for sale, and does not bring buyers and sellers together in a way that would make it responsible for the underlying retail transactions. Moreover, the company's role is limited to facilitating payments and managing fraud risk, rather than enabling or controlling the sales process.

Conclusion

The letter issued by the DOR confirms that payment processors and similar service providers that do not operate marketplaces or directly participate in sales are not treated as marketplace facilitators or retailers under Illinois sales and use tax rules. As a direct result of such an interpretation, these payment processors are not responsible for collecting or remitting Illinois retail taxes on those transactions.

Source: Illinois Department of Revenue - ST 25-0056-GIL